Student Association For International Affairs

Chinese firms should prepare to deal with fallout from mounting crisis in Brazil

Brazil’s political crisis is escalating, affecting the country’s economic and social stability, and Chinese companies and investors should be prepared to guard against potential risks in the country.

The Chinese Embassy in Brazil recently issued a safety warning, advising Chinese citizens and firms to pay attention to the situation, raise their security awareness and avoid crowded places in the coming six months. The warning was released amid rising security concerns and large-scale street protests demanding the resignation of Brazilian President Michel Temer.

The political scandal surfaced when Brazilian newspaper O Globo reported on May 17 that Temer gave his blessing to an attempt to pay hush money to silence a potential witness in a corruption probe; Brazil’s top court opened an investigation into Temer the following day. The explosive allegation caused the local stock market benchmark Bovespa index to plummet 8.8 percent on May 18, its biggest daily fall since 2008, while the Brazilian real also slumped 8 percent against the US dollar, its worst day in 18 years.

The consequences of the political crisis are hard to calculate. Volatility in the exchange rate and financial market will of course have an impact on the production, operation and profitability of companies in Brazil. Moreover, the ongoing political crisis may derail the economic reforms Temer introduced last year, including certain infrastructure projects involving foreign investment.

Also, with Temer refusing to resign, it is too soon to be able to tell when the economic turbulence may subside, further casting a shadow over the investment prospects for foreign companies, including those from China.

As Brazil is China’s largest trading partner and largest investment destination in Latin America, Chinese companies have made increased investment in the country over recent years, which will now inevitably be exposed to risks of political and economic turmoil. According to the Chinese Foreign Ministry, China’s accumulated investment in Brazil currently amounts to at least $30 billion, mainly focusing on infrastructure, energy exploration and transport facilities.

For instance, at the beginning of this year, the State Grid Corp of China concluded a deal to acquire a controlling 54.64 percent stake in Brazilian power group CPFL Energia SA and its subsidiary CPFL Energias Renovaveis SA for $5.68 billion.

It should be noted that it is not uncommon for Brazil to witness such political turmoil. Just last year, former president Dilma Rousseff was impeached, and this was also accompanied with street protests and an economic slump. Hopefully Chinese companies and investors are ready to withstand the risks this time.